Higher Ed: Bubble, Toil, and Trouble

Barb Wire

In a short post titled, “Professor Ikeda finds that higher ed has been oversold,” the John Locke Foundation’s George Leef introduces the article excerpted below by Sandy Ikeda:

[Professor Ikeda] sees the parallels between foolish government policies that created the housing bubble and similar policies that have given us a higher education bubble.

At least, the huge numbers of houses and condos built in excess of real market demand in the years 2002-2007 were well constructed dwellings. Many college students these days are “investing” in the equivalent of homes without roofs — mere credentials they can get without much work. The government’s “pro-college” policies have managed simultaneously to drive up the cost of going while driving down (at many institutions, at least) the educational value. As we have drawn in more and more weak, disengaged high school grads, that has led to irresistible downward pressure on academic standards.

Here’s an excerpt from the Ikeda article.  Note especially the rate of inflation in the cost of college over the past 30 years:

The government artificially lowers interest rates for borrowers who want to invest in a particular sector of the economy. Other things equal, that will increase the demand for assets in that sector as borrowers are misled into believing they will be worth more in the future than they actually will be. The current price of those assets will climb as will the quantity supplied (i.e., the demand curve slides up the supply curve). Borrowers will then clamor to keep borrowing rates low (or even lower) so they can afford to complete their investments, although that would also attract new borrowers. So pressure on demand continues and investment costs soar as asset prices and output keep rising.

Now, because government has kept interest rates artificially low—below the rate that would accurately reflect the actual supply and demand in the loan market—there is too much investment in those assets in relation to the actual demand for it. That means when investors try to sell their assets they will find no market for them. At that point the bubble bursts, bringing complementary sectors down with it.

If the Shoe Fits …

If you think this describes the housing market from 2001 to 2006, you’d be right. Just substitute housing/houses for asset/assets and “financial sector” for “complementary sectors” in the above narrative and you would get an accurate (though incomplete) summary of the recent housing boom and bust. (For an excellent discussion of this episode, see Peter Boettke and Steven Horwitz’s essay.)

But you could substitute “higher education” into the story as well.

As an author of the Economix blog over at The New York Times reports, data from the Bureau of Labor Statistics show that “college tuition and fees today are 559 percent of their cost in 1985. In other words, they have nearly sextupled (while consumer prices have roughly doubled).”

There’s a nice diagram in the post illustrating this. Tuition has been far outpacing price increases over time for consumer items, medical care, and gasoline.

Author Catherine Rampell argues, however, that “the main cause of tuition growth has been huge state funding cuts.” As an employee of a state university I can confirm that these cutbacks have indeed been taking place over the past couple of decades. The author offers some evidence to support her claim, but if you look closely, the dramatic rise in tuition still seems to outstrip the relative fall in state subsidies.

Read more: The Freeman

The opinions expressed by columnists are their own and do not necessarily represent the views of Barb Wire.

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